Trusting SCO

The SCO litigation against — well, let's be honest, against anyone they can think of — has gone on and on and on. As 2007 drew to a close, it seemed the end was in sight, after the company was forced to seek bankruptcy protection to avoid being thrashed in court — which eventually happened anyway. Now it seems the end may really be in sight.

SCO's bankruptcy "protection" has turned out to be a sieve rather than a safe — what was supposed to preserve the company's assets in order to protect the interests of its creditors has turned into an opportunity to funnel out as much cash as possible so IBM and Novell can't recover it. For some time, those familiar with SCO and its abnormal way of doing business have wondered how long it would take for the Bankruptcy Court to wake up and realize what they were up to. It would appear from Wednesday's activities that it finally has.

Wednesday's hearing in the United States Bankruptcy Court for the District of Delaware covered two very, very different proposals. SCO's plan, as it has been who knows how many times before, was to sell off basically all of its assets except the right to pursue its claims against IBM, Novell, and who ever else it has plans to sue. They've tried this over and over with a string of buyers, most of whom turned out to be the same people with a freshly registered name. The court, after two years, has apparently finally caught on to this, and told SCO its not buying it — and nobody else will be either.

Interestingly, Novell, IBM, and the U.S. Trustee made a similar motion, but with an altogether different motive. Where SCO wanted to sell off its business to keep fighting its creditors, the Novell/IBM/Trustee trio wanted to sell SCO off to pay its creditors, specifically by converting the Chapter 11 reorganization into a Chapter 7 liquidation. That would have ended SCO, permanently, and seen all of its assets sold off to cover its debts — though the possibility remains that the Court overseeing the Chapter 7 could allow SCO's litigation claims to be sold to someone who could then pursue them. Though that remains a very real possibility, the trio did not get their way, as their motion to covert was denied as well.

So, what did happen? A nice middle ground, it seems, at least at this point. The court finally came out and questioned SCO's good faith — which is much like asking about Satan's ski gear — and decided that they would be more likely to produce a purple cow giving Pepsi than a workable rehabilitation plan. From the ruling: "No one can fairly argue that the court has not been patient with the debtors. The court is now unwilling to continue to wait while debtors' losses mount." Further, he no longer believes SCO's management can or have any desire to run the company in a manner consistent with rehabilitation. [Read: To do something other than bet the whole ball of wax on baseless litigation.]

The judge also found, however, that liquidation isn't quite right either, or at least, that he isn't in the right position to decide that it is. To that end, and given the management's inability to effectively manage, the court ordered that an independent trustee1 be appointed to oversee SCO's affairs. What exactly does that mean? It means that SCO's management — including Darl McBride, the architect of the Sue & Screw™ strategy — just lost their driving privileges. From now on SCO's board and officers have no authority to do anything of any importance. They will, presumably, go on doing their jobs — unless the Trustee axes them — but all the decisions about the company's future are the exclusive purview of the trustee (and, of course, the Bankruptcy Court).

One particular item of note, which has generated a great deal of discussion, is the court's decision to place the matter of continuing the lawsuits in the trustee's hands. In his decision, the judge held that the court is not in a position to determine, without conducting a "mini-trial," whether the debtor has any chance of succeeding in its litigation, and that even if such a trial was held, any outcome would still be speculation. The part that has generated considerable comment is the apparent reversal of this position in the appointment of the trustee — while the court states it can't decide whether there is any chance of prevailing, it places the responsibility of doing so squarely on the trustee.

While there certainly appears to be an inconsistency between the two, it would seem to make more sense with a shift of perspective. The court's remit — and by extension, the judge's — is to determine the facts, draw conclusions from the law, and then rule. To that end, it must hold trials and hearings, take evidence, and base its decision only on the facts presented in light of the applicable law. This is the reason that speculation and hearsay are prohibited at trial — it's not evidence. Given this, the judge is correct — the court cannot make a decision that would amount to speculation and then proceed based on it. The decisions it makes must be supported by the facts and the law.

The question to ask, however, is: "What is the trustee's remit?" A trustee, like anyone else, must follow the law, and would not remain in their position for long if they ignored the facts before them, but a trustee isn't a court, and isn't a judge. The trustee isn't charged with finding facts, deciding the law, and issuing decisions — they are entrusted with managing the affairs of the debtor. The United States Trustee Program Chapter 11 Trustee Handbook sums up the duties of the trustee as: "In short, a chapter 11 trustee is a fiduciary charged with protecting the interests in the bankruptcy estate of all parties, including all classes of creditors and the debtor. The trustee must protect and preserve estate assets."

One specific provision of 11 U.S.C. § 1106(a) seems particularly relevant to the matter of the litigation. § 1106(a)(3) requires that a Chapter 11 trustee:

[E]xcept to the extent that the court orders otherwise, investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor’s business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan. (Emphasis ours.)

SCO's litigation is certainly a large part of its business — indeed, it wants to make it 100% of its business — and is highly relevant to the case and particularly to the formation of a plan, as a big victory would give it more than enough cash to pay of its creditors and emerge from bankruptcy protection. It would seem then that, even without the court ordering it to, the trustee has the obligation — by law — to determine whether the litigation should continue. Beyond that, in light of the trustee's function as a sort of guardian ad litem, it makes sense for them to make the decision — they are standing in for the management, who would normally make such a decision, but are unable to.

The point here isn't to play Miss Cleo and divine what will happen in the end — it's to decide if there is a reasonable claim to be pursued that has a reasonable chance of prevailing. The trustee doesn't need to know for sure what will happen, they just need to have taken an impartial look at the circumstances and made a rational decision about the chances of winning, just as any (respectable) attorney would do when advising a client about pursing a case. That is the trustee's real remit, to "manage and operate the property in his possession as such trustee, receiver or manager according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof." (28 U.S.C. § 959(b), emphasis ours.)

And what about that part of the job description requiring "protecting the interests in the bankruptcy estate of all parties, including all classes of creditors"? Protect is a tricky word in this context — it would certainly "protect" IBM and Novell to dismiss the litigation, but that isn't really the type of protection involved. What the trustee is bound to protect, as it relates to the creditors, is the ability to pay them, and making an impartial decision about pursuing the litigation does exactly that. If there is merit in continuing, a reasonable likelihood of winning — and we certainly aren't saying there is, if we haven't made that abundantly clear on numerous occasions — then pursuing it is in the best interests of the creditors, IBM and Novell included, because winning that is really the only chance any of them have of ever seeing even a fraction of what they are owed. The money might be coming from IBM and Novell, but that is immaterial for the trustee — the trustee's responsibility isn't to keep IBM and Novell from losing lawsuits, it's to see that legitimate claims by creditors are paid.

Consulting our own crystal ball, we predict the trustee will find there is no merit in SCO's claims and that the lawsuits should be dispatched — with any luck, the trustee will withdraw the appeals and move to dismiss the suits with prejudice, putting a final end to the litigation, once and for all. The trustee's authority doesn't — or at least, doesn't by default — convey the power to end IBM, Novell, and everybody else's countersuits, but the Bankruptcy Court can. We predict, however, that with the suits against them dismissed, and with SCO in bankruptcy with no chance of emerging, the creditors/counter-plaintiffs will want to wash their hands of the whole matter. For now, all that can be done is to wait eagerly for the trustee's report, and hope that terms like "baseless," "spurious," "wholly without merit," and "liquidation with extreme prejudice" appear repeatedly.


1 Not to be confused with the U.S. Trustee, a federal official who administers and oversees bankruptcy cases on behalf of the Department of Justice, who is also involved in SCO's case, and will be appointing (with the court's approval) the Chapter 11 trustee.

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